Financial Ideas, Political Constraints: Sovereign Wealth Funds and Domestic Governance

Abstract

Rather than deconstruct sovereign wealth funds' (SWFs') significance for global capital markets, this paper asks the following question: why do SWFs exist at all? It consequently examines the politics behind SWFs' domestic origins, and the socioeconomic implications they pose for the constituents to whom they are ultimately accountable. It begins its analysis with the argument that SWFs are first and foremost domestic strategies of governance created to achieve specific short- and medium-term goals of the administrative state. The funds serve to immediately stabilize state actors' governance function by reconceptualizing problems of uncertainty in the quantitative and manageable terms of financial risk. This risk-based fiscal management strategy enables state actors to manage domestic expectations concerning various problems they may face: how to use extra-budgetary foreign exchange reserves, for example, or how to meet a future liability. For Ireland, the expectation that their highly depended-upon state pension system was unsustainable represented one such problem of uncertainty facing the Oireachtas in the late 1990s. Creating an SWF mandated to maximize financial returns through speculation thus immediately created forward-looking expectations of the Oireachtas' capacity to generate investment income and lessen the cost–savings gap. However, this paper also argues that the speculative financial ideology substantiating SWFs' institutional legitimacy problematically constrained Irish state agency between 2001 and 2010. This constraint was most evident following the Irish banking crisis of 2008.